Hard Money Lending

Hard money is basically quick and easy access to cash.

by David Dweck

 

When you aren’t paying all cash, the financing component when structured properly can assist you in acquisition and put more money in your pocket.

When you pay cash for a property, it doesn’t necessarily mean you dig into hip pocket bank and whip out the cold hard cash. You can use hard money, private money or equity lending.

These three methods are similar. Bottom line is utilizing either of these methods you are using OPM- Other People’s Money!
As a current hard money borrower and lender, I’ll touch on how that works: The application process should be quick and easy. Typically, a hard money lender is loaning on equity at 65% of the ARV- After Repaired Value. Some lenders in the current market are at 50% LTV (loan to value). For the right borrower and the right property, I will loan 100% and in some cases, loan them the money to make repairs!! That’s over 100% financing.
Let me tell you about a recent “double dip” (meaning I profited from two income streams). One of my coaching students acquired a property from me that I had worked on for a few months. I had tied it up under contract and it happened to be an estate sale. The contract and the deed needed 9 signatures and one of the heirs was in jail!! Needless to say, the transaction took a while. My exit strategy was if I didn’t sell it wholesale, I would retail it. The property was a three bedroom house that was worth about $225,000 and needed about $25,000 in repair. I purchased it for less than $100,000, flipped it wholesale, and loaned my student money for closing costs and repair. He was borrowing at about 50% LTV and was solid credit wise.

For your information, true hard money lenders don’t verify income. They perhaps want to see that you have the money to carry and fix the property. Hard money is basically quick and easy access to cash. Credit is so tight in the current market making it harder than ever for borrowers to get bank financing, especially when the property is in need of repair. As a hard money lender, I’ll let borrowers close in an LLC, corporation or land trust. All hard money lenders require a personal guarantee.

ACTION TIP- Beware of hard money lender “junk fees”. Ask for a good faith estimate. Expect to pay points that vary from market to market, a document preparation fee, inspection, processing and administration fees.

I typically don’t charge for an appraisal or survey unless I feel the need for one. Make sure your lender has a good reputation. I’ve seen lenders bail on the day of closing, and I step in and close the deal.

ACTION TIP- Don’t “hurry up and close”. Typically if someone is pushing you to close in a hurry, you can rest assured that something is not right or something will go wrong. NEWBIES beware of this!!!

Perhaps you have money you would like to lend. If so, a great way of doing so is through a self directed IRA. Earning double digit interest and getting paid every month is a fantastic way to earn income instead of 5% in a CD.
As a lender/underwriter, my lending philosophy is I wouldn’t make a loan on a property I wouldn’t want to own myself. In essence, if the borrower defaults, I wouldn’t mind owning it.

This article appears in “Work Smarter, Play Harder”TM for Real Estate Investors manual by David Dweck